N.Y., States Lead on Bond Insurance Solution, Citing Federal Failure

New York Governor Eliot Spitzer and Insurance Superintendent Eric Dinallo have been leading the call for solutions to the growing bond insurance crisis.

They and others are also blaming federal regulators for failing to act to avert the crisis and using that failure to oppose federal regulation of insurance.

Both Spitzer and Dinallo spoke before the U.S. House of Representatives’ Financial Services Committee’s Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.

The biggest bond insurance companies are domiciled in and regulated by New York. Dinallo said he has been working with bond insurers, investment banks, private equity investors, and rating agencies to find solutions.

Spitzer urged lawmakers to act quickly.

“If we do not take action, this could be a financial tsunami that causes substantial damage throughout our economy,” he warned. He said a destabilized bond insurance market could affect individual investors, colleges and nonprofits. Also local governments could face higher borrowing costs. For example, the Port Authority of New York and New Jersey has traditionally paid 4 percent on its auction rate securities but is now paying 20 percent.

Spitzer, referencing the subprime lending crisis, maintained that bad lending practices were identified several years ago by state attorneys general and others, however, steps to correct the problems were blocked by the Bush Administration.

“Relevant regulators had an opportunity to act, but did not,” Spitzer said.

Opponents of federal regulation of insurance seized upon the crisis to argue their case for state regulation of insurance.

After committee Chairman Rep. Paul Kanjorski was quoted as saying there needs to be “better federal oversight of the insurance industry,” Catherine J. Weatherford, NAIC executive vice president, countered.

“The current problems in the markets were caused by the failure of federal — not state — regulation. And the facts support us,” Weatherford stated.

She said the bond insurance problem happened in part because of lax oversight by federal agencies — the Office of the Comptroller of the Currency, the Federal Reserve and the Securities and Exchange Commission — and, in some cases, despite warnings from state regulators.

“Everyone on the federal level who contributed the kindling, logs and matches that caused this fire should not now take away authority from state regulators who have been keeping the flames in check,” Weatherford said.

She said the role of state insurance regulators is to ensure that bond insurers have the financial ability to pay claims, and to date, they have.